Steel demand outside of China in the next six months is far more likely to surprise to the downside than the other way around. Developments stunting steel demand may include: a) decreased infrastructure spending (with the USA perhaps the exception) as governments reduce funding amidst rising interest rates and debt servicing costs; b) declining capital spending by industrial companies the world over due to higher interest rates and reduced credit availability; and c) less optimistic consumers as pent-up savings from the Covid years of 2021-22 “evaporate” amidst higher costs of goods and services (i.e. inflation) and, more worryingly, unemployment rises later this year. (Note: Fixed asset investment – that’s composed of construction and capital spending – may account for about 94% of Chinese steel demand and perhaps 85% of non-Chinese steel demand.)
- China’s government policymakers in the next few months, in WSD’s opinion, could implement additional measures to boost economic activity, although this is not likely in our view. A different type of measure, or two, are far more likely in WSD’s opinion: 1) an announcement curtailing steel production in 2023 to a level below that of last year; and 2) a potential increase in export duties to further constrain output and ensure the production target is met. The combination of these two actions, if implemented, could significantly reduce the risk of oversupply on the world export market come second half of this year whilst simultaneously acting to reduce the spot prices of iron ore and coking coal, thereby reducing production costs ex-China and preserving steel mill margins closer to “Fair Times” levels than “Bad Times.”
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- Hooray! China’s oversupply of steel is encapsulated in the country, and the latest rumors of a production cap in 2023 are an indication of this possibility. The mandated Chinese steel production restraints, with hints of this policy becoming evident in late 2020, are quite the miracle for non-Chinese steelmakers.
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- Policymakers in late-2023 could restrict steel output in the Beijing region in order to lessen the air pollution risk; holding back steel production is a double benefit for Chinese policymakers as it diminishes the country’s energy intensity, which is as important a national goal of CO2 reduction; and, second, it helps to cap the country’s CO2 emissions (of which the steel industry accounts for about 15% of the total).
This report includes forward-looking statements that are based on current expectations about future events and are subject to uncertainties and factors relating to operations and the business environment, all of which are difficult to predict. Although we believe that the expectations reflected in our forward-looking statements are reasonable, they can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including among other things, changes in prices, shifts in demand, variations in supply, movements in international currency, developments in technology, actions by governments and/or other factors.
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